BROAD MARKET REVIEW & OUTLOOK WITH VIEW FOR 5TH MAY 2011

SHOULD YOU BUY AT THESE LEVELS OR WAIT FOR SOME MORE CORRECTION???

ATTEMPT IS BEING MADE TO PUT FORWARD SOME REASONS/FACTORS TO WAIT AS THERE MAY BE SOME MORE PAIN LEFT IN THE MARKET:

SLOWING GROWTH,RISING INFLATION AND INTEREST RATE , WITH A FALLING MOMENTUM ARE NEGATIVE TAILWINDS FOR THE MARKET, IN A REGION(ASIA & EMERGING ECONOMIES) GENERALLY ACCUSTOMED TO HIGH GROWTH RATES WITH LOW PE MULTIPLES BACKED BY SUSTAINED EARNINGS GROWTH. CLEARLY THERE IS NO VISIBILITY IN EARNINGS AS OF NOW FEW ARGUMENTS AND REASONS HAVE BEEN DESCRIBED BELOW, WHICH NEED TO BE CONSIDERED HONESTLY AND CAUTIOUSLY:

Investment cycle/capex: Strong government focus on rural development, salary hikes to government amidst high growth has

vastly expanded aggregate demand. Labour shortages are becoming a binding constraint on growth and risk compressing margins of companies.Investment preference these days in consumer-facing, less labour-intensive companies with pricing power. IT/BPO, mid-caps, construction and real estate companies are more vulnerable to labour shortages.

Labour shortages:

Macro outlook for earnings would be tough next year: wage pressures, rising commodity prices, elevated inflation,tight liquidity, downward sticky interest rates, strong rupee, government expenditure in the backdrop of strong domestic consumption and below-trend global economic growth. See downside risk to consensus-based growth expectations of 20% for FY12F.

Earnings:

See strong headwinds to inflation on rising global commodity prices. Labour shortages and rising wages could exacerbate the wage-price spiral. Expect some tapering off in 1HCY11F on base effects. Market momentum at risk amidst rising inflation. See downside risk to banks while metals would likely benefit from rising commodity prices.

Keeping these in mind some disappointment in short to-medium term is seen along with several obstacles to the capex cycle despite strength 

 in demand. With a few large sectors driving organised manufacturing capex, the investment outlook for these key 

capex-driving sectors remains muted next year. Meanwhile, the unorganised manufacturing sector suffers the 

 

most in an environment of very tight liquidity.

ANOTHER ACTION OF FINANCE MINISTRY IN ROLLING BACK OF DEPB MAY HIT THE MARGINS OF THE EXPORT ORIENTED COMPANIES.

DEPB stands for Duty Entitlement Pass Book. It is a scheme which is offered by the Indian government to encourage exports from the country. DEPB means Duty Entitlement Pass Book to neutralise the incidence of basic and special customs duty on import content of export product. This is provided by way of grant of duty credit against the export product at specified rates.

The DEPB scheme was introduced in 1997, allowing exporters to earn duty credit at a notified percentage of the FOB value of exports. The DEPB rates are notified based on an assumption that the exporter has used duty-paid imported inputs, whether or not he actually does. This assumption brings in an element of subsidy. 

 
So, right since 2001 there have been proposals to do away with the scheme but for want of a suitable alternative, it got periodic extensions. 
 
Last August, the commerce minister said, “Despite the fact that this scheme had clearly been identified for early sunset, we extended it till December 31, 2010, in view of the difficult international economic situation and contraction of demand in developing economies.” He said recognising the fragile recovery and prevailing uncertainties, he had been able to obtain extension of DEPB one last time for a further period of six months till June 30. 
 
The thinking in the finance ministry seems to be that in recent months the global economy has recovered and exports have shown robust growth, exceeding the 2010-11 target. Second, Budget calculations were based on a projected nine per cent GDP growth but actual growth is more likely to be eight per cent. So, in the interest of fiscal consolidation, some subsidies need to be cut, DEPB being one. 
 
On the other hand, the commerce ministry seems to believe the trade deficit is still high and there is continued uncertainty regarding international crude oil prices, impact of the earthquake in Japan and sustainability of global economic recovery. Therefore, this is not the time for doing away with DEPB, the most popular and exporter-friendly scheme for more than a decade. 
 
In a recent interaction with exporters, the director general of foreign trade said the commerce ministry would try to persuade the finance ministry to continue the scheme for some more time. But, the tough stance of the finance ministry on income tax breaks under the SEZ and EOU schemes is a cause of worry for exporters. A possibility is the commerce ministry may offer to prune the DEPB list to sectors that need support and ask to retain the scheme. In any case, the uncertainty regarding continuation of the scheme must end. 

Following companies might get hit by shrink in the margins by 2%-4%: MAJOR AUTO COMPANIES LIKE HERO HONDA,BAJAJ AUTO, M&M, MARUTI, TATA MOTORS, TVS MOTORS. Already rising interest rate have to hit the topline and now this act may also worse the situation for Auto Industry.

Textile Companies like ALOK , ARVIND leather company like MIRZA INTERNATIONAL etc and many other export oriented companies get hit.

ON INFLATION & INTEREST RATE:

The Reserve Bank of India increased the benchmark repurchase rate by half a percentage point to 7.25 percent yesterday, the biggest move since July 2008, and Governor D.Subbarao forecast the economy may grow about 8 percent in the year through March from 8.6 percent in the previous year.

ON RATE INCREASE:

We have seen a series of rate hikes and the impact of that will start hurting growth. The Reserve Bank of India had refrained from doing this in the past as they did not want to hurt growth. Given the global uncertainties, growth was a priority.This kind of prolonged phase of high inflation is not expected. To that extent everyone has been surprised. The underlying growth momentum is still fine; it’s just that the near-term pressures are all staring at us at the same time.

ON INFLATION:

Inflation should start trending down because a 50 basis point increase in rates is a pretty strong measure. Inflation should start cooling off in the next three to six months. If that happens, it will be a positive signal for the markets.

ON CORPORATE EARNINGS:

Margins will be under pressure. In the near term there will be earnings downgrades. For the year ending in March 2012 we will see 17 percent to 18 percent earnings growth compared with the 20 percent to 22 percent estimated earlier.Hence this will affect the Sensex & Nifty Valuations. We expect Sensex to touch 17700-18000 & Nifty to 5350-5400 in near term, say any time in may-june. The other most important factor shall be the monsoon. Average spread of monsoon and easing of inflation will certainly change the outlook in next 25-45 days and may help in better earning forecast.

ON INVESTMENT STRATEGY: This is a transition period, with clearcut down trend in the market. Any upside move to 5600-5630-5650 should be used to exit the longs and sit on cash. STRICTLY CASH.Does this means that one can short at 5600-5630. Yes only professional and seasoned traders can do so. Those who are not very expert in shorting can buy PE5600 they may gain by next week. Banks are the best candidates for shorting.

MANY STOCK IDEAS BY VARIOUS ANALYSTS AND EXPERTS WILL BE SHARED HERE LATER. HOWEVER IT REMAINS TIME TO BE CAUTIOUS.